Schafer: Cuts inevitable in Best Buy turnaround

The presentation Best Buy Co. Inc. executives gave in November to a room of investors and analysts was 55 slides.

There is always an element of show business involved in putting on a proper New York investor day, and so renting a ballroom and then showing just eight slides probably wouldn’t have been that well received. But about eight was all CEO Hubert Joly and his team needed to show his “Renew Blue” plan. It’s really that simple.

Run a better business. Get rid of dead space in stores. Invest capital where it gets the best return. Stop investing where it gets poor returns. Help store employees solve customer problems.

And tighten up on what gets spent — as we saw on Tuesday with the announcement that 400 jobs had been cut at Best Buy’s headquarters in Richfield.

There’s more to the cost-cutting plan than layoffs, of course, as not paying salaries and benefits for 400 positions can’t come close to the $150 million in annual savings that was disclosed Tuesday. Most of the expense reductions had to have been made by cutting budgets for travel, dropping contracts for consultants, reducing outsourced services in information technology and similar line items.

The investment community has for some time assumed that Joly and this team will find plenty of ways to cut spending, in part because Best Buy had been executing an expansion plan for so long that burying poor spending decisions or overstaffing some departments would have been relatively easy.

So there are a lot of budgets to be scrubbed. Best Buy spent roughly $40.8 billion in fiscal 2012 in North America on products it sells to customers and everything else it buys to run its business, including buying the time of its employees.

Joly’s savings target that he presented in November was 1 percent of annual cost of goods sold, or roughly $325 million. Part of that was to come from improvements in the “supply chain,” meaning the process it takes to get a product from manufacturing all the way into a Best Buy store.

This is not something we on the outside will ever see, unlike headquarters layoffs, but some Best Buy suppliers are likely being asked to figure out how to operate more efficiently or they will feel some financial pain.

On the sales, general and administrative expense line, the target was 5 percent. Of the amount spent in 2012, 5 percent is roughly $400 million in savings, of which $150 million is already done.

Best Buy’s spokesman said the management team will have more to say about the details of the reduction when it discusses financial results for the fourth quarter on Friday morning.

Can’t imagine any surprises in this part of the discussion. There was almost certainly no new information that led to this week’s reduction in staff. It was in the plan.

It almost certainly had nothing to do with whether founder Richard Schulze makes a proposal to acquire the company by the time his window to do so closes on Thursday. His effort is largely irrelevant to the plan.

Nothing simple in execution

It’s also worth noting that calling a plan simple is not to suggest that executing it will be easy. Among other things the leadership will need to trim expenses at the same time it’s calling on employees and vendors to step up their effort.

In the wake of any layoff, managers will be confronted by questions from their own staff on what’s coming next. They will also hear a more fundamental question, whether the company has moved forever from being a company of growth and increasing opportunity for the people who work there to one that’s going to be managed on the basis of cost containment and efficiency.

Actually, maybe not. Joly has said nothing about a diminished future. What he has said to investors, and what this week’s reduction in expense was all about, is that the financial performance of the company just has to improve. Return on invested capital was 16.8 percent in fiscal 2008 and has since been bumping along at around 11 percent. Not good enough.

He wants it back in the midteens, at a comparable level to the returns generated by big retailers such as Home Depot.

That’s not necessarily going to be easy to achieve, but employees need to understand one thing about increasing returns on invested capital — it’s what generates growth and new opportunities. If there’s a way Best Buy or any retailer can generate returns like that in new stores, new formats, new merchandise categories, then that money will get invested.

The message inside, what people need to be doing at work the week of a big layoff, is also likely just as simple as the message given to investors in November. I got a sense for it when at the company earlier this month, meeting with Joly and Shawn Score, the leader of Best Buy’s U.S. retail operations.

In the conversation with Score, he was talking about customer “pain points,” a term he means for what annoys or aggravates a Best Buy customer.

Product sold out? That’s a pain point. Find various pricing plans baffling when buying your teenager a new cellphone? That’s another pain point. So is having home theater components not connect to one another without a cable that doesn’t seem to be in the box that came from the store.

“We address those pain points … and it’s done with our entire store population. And our corporate team,” Score said. “If you are doing more to solve those for customers, then it’s the right work. If you are not, you might be working on something that’s not very valuable to the mission.”

Lee Schafer came to the Star Tribune after 15 years as a corporate officer, consultant and investment banker in the Twin Cities. He has been a columnist for Twin Cities Business magazine and was senior editor for Corporate Report Minnesota. Follow @LeeASchafer